Will Korea is Fiscal Stimulus Crash the Won? Structural Analysis of KRW Exchange Rate Risk [EN]
In these times of abundant information, paradoxically, the sheer volume of it has made distinguishing right from wrong even more difficult. Whose words are actually correct?
A universal cash transfer (livelihood relief fund) policy corresponds to an 'Expansionary Fiscal Policy' in macroeconomics. However, there are conflicting arguments. Some argue that by utilizing 'expenditure restructuring'—cutting delayed or unnecessary parts of the existing budget to fund the supplementary budget—the national debt will not increase. Conversely, many argue that since fiscal expansion placing downward pressure on the domestic currency's value is an absolute mechanism of the economic system, the liquidity released into the market will stimulate inflation. To cover this, the massive issuance of government bonds will damage the national debt ratio, triggering a structural exodus of foreign capital.
Watching the heated debates in the political arena, one can easily get caught up in the crossfire. Therefore, you must take a step back, completely exclude emotions and political colors, and look at the actual data to see the true nature of the capital market. Releasing money inevitably returns as a bill for someone to pay. But is the size of that bill truly enough to shake the nation? Numbers do not lie.
EXECUTIVE SUMMARY
To state the conclusion first, a universal cash transfer policy is economically an 'expansionary fiscal policy,' and it is true that it inevitably puts downward pressure on the value of the Won (pushing the exchange rate up). The money released into the market stimulates inflation, and issuing debt (government bonds) to finance it damages the national debt ratio, triggering a structural exodus of foreign capital and ultimately shaking the nation's credit standing.
However, framing this as the 'sole culprit' for the exchange rate surge is an exaggeration that ignores the data. The massive gravity currently suppressing the value of the Won comes mostly from overseas (U.S. interest rates, the strong dollar trend), and the relief fund policy merely acts as an 'auxiliary engine' that accelerates this downward trend. The truly terrifying detonator is not the short-term exchange rate figures, but the collapsing 'national fiscal discipline' itself. This report objectively dissects through which channels a 'cash transfer policy' actually negatively impacts the Won/Dollar exchange rate system, and what its actual weight of influence is compared to global macro variables.
01. The Butterfly Effect of Inflation: How 250,000 Won in My Wallet Makes the Dollar More Expensive
When Money is Released, the Value of Money Drops
The exchange rate is determined by the relative purchasing power parity of two countries' currencies. Ultimately, it is the 'exchange ratio' of the two currencies. If the Won becomes abundant in the market, its value against the dollar naturally drops.
According to current Bank of Korea statistics, as of January 2026, South Korea's average balance of broad money (M2) reached approximately 4,108.9 trillion won. Notably, the M2 to nominal GDP ratio is at 153.8%, indicating structurally bloated market liquidity compared to the U.S. (in the 70% range) and other major advanced countries.
Let's assume an additional 13 to 15 trillion won in cash is injected, distributing 250,000 won per person.
If this money doesn't just stay in wallets but goes through banks to create credit (the money multiplier effect), it becomes an artificial release of money without productivity gains. According to the quantity theory of money ($M \times V = P \times Y$), this amplifies the money supply in the real economy and inevitably stimulates prices (inflation). (However, in reality, the velocity of money ($V$) is not always constant, and real output ($Y$) can also change in the short term.) A decline in the purchasing power of a unit of currency directly leads to a decline in the external value of the Won, that is, a 'rise in the Won/Dollar exchange rate'.
In a situation where the U.S. Federal Reserve maintains a cautious monetary policy to control residual inflation, if South Korea unilaterally releases money, the attractiveness of the Won from the perspective of foreign investors will inevitably drop immediately.
02. Government Bond Issuance and the Risk Premium
There Is No Such Thing as a Free Lunch
The funding for tens of trillions of won in relief funds has no choice but to be entirely financed through the issuance of 'deficit-covering bonds' unless there is excess tax revenue. The biggest issue here is how to secure this massive funding. In the current situation without excess tax revenue, to raise 13 trillion won, the government must inevitably take on debt. According to the Ministry of Economy and Finance's '2026 Budget Proposal' and medium-term fiscal plan data, the total national debt is expected to surpass 1,400 trillion won for the first time in 2026, reaching 1,415.2 trillion won, with a record high of 110 trillion won in deficit-covering bonds issued in a single year.
Sovereign Risk
What happens when a flood of government-issued bonds pours into the bond market? Bond prices crash, and government bond yields soar. Normally, during a period of healthy economic growth, rising interest rates act as a factor to boost currency value. However, in a phase of fundamental stagnation like the present, rising interest rates driven by debt financing are interpreted as an expansion of 'Sovereign Risk'.
Looking at the Ministry of Economy and Finance's medium-term fiscal plan data, the total national debt has already surpassed 1,400 trillion won, and the national debt-to-GDP ratio has well exceeded the psychological threshold of 50%, reaching 51.6%. Global credit rating agencies and foreign investors perceive this steep rise in national debt as a 'Red Flag'. If they judge that "the South Korean government's fiscal health is becoming dangerous," they raise the risk premium (such as CDS premiums) on Korean assets and pack their bags to leave (Sell Korea). As foreigners sell Korean stocks and bonds to buy dollars and exit, dollars become scarce in the foreign exchange market, creating a structure where the exchange rate has no choice but to rise.
03. Cold Empirical Verification: Is It Really Because of the Relief Funds?
Now, reading up to this point, you might think, "Ah, the exchange rate is tanking precisely because of the livelihood relief funds!"
However, when you run the actual data, the story is a bit different.
A Smaller Scale Than Expected (Scale of Impact)
Assuming a relief fund of 250,000 won per person, the required budget is around 13 trillion won. Thirteen trillion won is an enormous sum of money, but compared to South Korea's annual economic size (nominal GDP of roughly 2,400 trillion won), it is merely about 0.5%. While the marginal impact of these funds on inflation and the bond market definitely exists, it is not a tipping point with the destructive power to collapse the entire South Korean economic system overnight.
External Macro Fundamentals
The Real Culprit Lies Elsewhere – Global Macro Dominance
The most terrifying true gravity threatening to push the exchange rate into the 1,400 won range right now is not domestic relief funds. It is the longest-ever interest rate reversal between South Korea and the U.S. (where U.S. rates are significantly higher than South Korea's) that has continued for over 40 months, the global hegemony of the strong dollar, and the trade balance fundamentals of core export industries like semiconductors.
The Longest Korea-U.S. Interest Rate Gap in History
As of the first quarter of 2026, the Bank of Korea's benchmark interest rate is 2.50%, while the U.S. maintains a level around 3.75%, resulting in a 1.25%p gap in the interest rate reversal. This inversion has persisted for a record-breaking 41 months, forcing a structural exodus of funds toward the reserve currency nation.
The Hegemony of the Global Strong Dollar
The structural strength of the U.S. Dollar Index (DXY), driven by global geopolitical bloc formation, is universally suppressing the currency values of emerging markets.
Current Account Terms of Trade
The export cycles of core industries such as semiconductors and the size of the trade surplus determine the actual fundamental demand for the Won.
In other words, the fundamental cause of the exchange rate surge lies in the global macroeconomic environment, and the livelihood relief funds merely play the role of an 'accelerator pedal (auxiliary engine)' fanning the flames of this weakening Won trend. (According to mathematical modeling analysis, the direct responsibility for the exchange rate increase is estimated to be around 10-15%, while the remaining 85% or more is due to the U.S. and the global macro environment.)
To put it simply, the fundamental trend of rising exchange rates is formed by the global macro environment and the Korea-U.S. interest rate gap, and the domestic large-scale cash welfare policy is like attaching an additional auxiliary engine to a moving car.
04. Conclusion: What Truly Collapses is Not 'Numbers' but 'Trust'
To summarize
In conclusion, the proposition that massive livelihood relief funds negatively impact the Won/Dollar exchange rate is a macroeconomically irrefutable 'Fact'.
This is because it is a given that the distribution of massive livelihood relief funds exerts sustained upward pressure on the Won/Dollar exchange rate (downward pressure on the value of the Won) through the expansion of broad money (M2) and the accumulation of a record-breaking scale of deficit-covering bonds.
However, what we, as investors, must truly fear is not the short-term numerical fluctuations of the exchange rate. If a precedent is set where the distribution of tens of trillions of won in cash for political purposes is easily decided even when the debt ratio has surpassed 50%, the global capital market will judge that South Korea's 'Fiscal Discipline' has collapsed. In short, the creditworthiness of the South Korean government will fall.
The Credit and Trust of the South Korean Government
Once broken, credit and trust are not easily restored. If massive cash distribution becomes systematized in an environment where the national debt ratio has broken through 51.6%, the global capital market will permanently adjust the credit risk upward for all Korean Won assets. Because South Korea is not a reserve currency nation, it suffers a far greater impact from credit risks compared to other countries.
If a permanent discount is applied to all Korean Won assets, that itself would be the most fatal act of self-harm—dismantling with our own hands the 'defensive fortifications' that would protect our capital when a macro-geopolitical crisis strikes in the future.
System View observes and analyzes the global system from a neutral perspective. We are not biased toward the viewpoints of any specific ideology or group, providing independent analysis based on data and structural logic.
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